WEBVTT 00:04.720 --> 00:08.410 Price is what you pay value is what you get. 00:08.870 --> 00:09.590 OK. 00:09.590 --> 00:15.730 Now let's talk about price and value both price and value are the two sides of the same coin. 00:15.770 --> 00:20.540 Understanding the difference between price and value is important because it helps you sort out good 00:20.540 --> 00:23.180 investments from bad investments. 00:24.610 --> 00:26.680 So I want you to take a quick note here. 00:26.950 --> 00:30.590 Price in value are not always the same. 00:30.820 --> 00:36.230 You know most inexperienced investors look at a stock's price to determine if it's cheaper expensive. 00:36.460 --> 00:40.020 They think that a $5 stock is cheaper than a $50 stock. 00:40.360 --> 00:46.120 Well it seems cheaper because of the price tag but they don't know that their $5 stock may be only worth 00:46.120 --> 00:47.020 two or three dollars. 00:47.020 --> 00:52.900 For example while the $50 stock can be worth over $80 or maybe $100. 00:52.990 --> 00:56.220 So that's the difference between price and value. 00:56.320 --> 01:01.990 You know looking at the price side is not investing it's gambling because you have no idea about how 01:01.990 --> 01:08.770 much your stock is actually worth only considering the market price is the same as you go shopping. 01:08.770 --> 01:12.310 You buy a product because the shop tells you that there's a promotion. 01:12.310 --> 01:15.550 They discount the product and you feel you're buying something cheap. 01:15.970 --> 01:21.310 But the thing is even with the discount that shop can still make a profit because they're selling you 01:21.310 --> 01:24.850 a product at a price that's higher than its cost of production. 01:24.850 --> 01:27.580 So that product is overvalued. 01:27.580 --> 01:30.460 The same for the stock market as a value investor. 01:30.550 --> 01:36.250 We need to look at the value side so before making your investment in a company you need to make sure 01:36.250 --> 01:41.590 that you'll only buy it when it's undervalued. 01:41.590 --> 01:43.950 There are three types of value that you need to know about. 01:43.990 --> 01:49.690 If you want to be successful as a value investor evaluating these values carefully We'll show you a 01:49.690 --> 01:54.170 clear picture of how profitable a potential investment is. 01:54.180 --> 01:56.660 The first is relative value. 01:56.700 --> 01:59.010 The second is absolute value. 01:59.220 --> 02:02.520 And the third is perceived value. 02:02.520 --> 02:05.240 Now let's dive into each of them in turn. 02:07.290 --> 02:12.810 Relative value can be determined by comparing a company's financial performance with that of its competitors 02:12.810 --> 02:16.450 within the same industry and also at the industry average. 02:16.710 --> 02:22.380 The differences between a company with its rivals tells you exactly how well it's operating and generating 02:22.380 --> 02:23.660 profits. 02:23.910 --> 02:29.370 When a company is profitable and able to operate efficiently that will make a significant contribution 02:29.370 --> 02:31.400 to its shareholders value. 02:31.410 --> 02:38.370 This simply means the more profitable the company is the more profitable you are as a shareholder. 02:38.370 --> 02:44.850 So to determine relative value the easiest method you can use is performing a financial ratio analysis 02:45.520 --> 02:52.200 will simply compare companies profitability efficiency liquidity and solvency ratios with that of its 02:52.200 --> 02:58.140 competitors and the industry average the company with the best ratio values will be the best company 02:58.140 --> 03:02.640 in the industry and its a worthwhile investment in terms of its relative value. 03:03.510 --> 03:07.230 Financial ratio analysis is a big topic in value investing. 03:07.230 --> 03:10.250 So I'll teach you how to use financial ratios the right way. 03:10.320 --> 03:11.910 In another course. 03:11.910 --> 03:17.670 But right now you just need to know that it exists and youll need to learn about it later to master 03:17.670 --> 03:19.560 your value investing skills. 03:21.110 --> 03:25.940 OK the second value that we're going to talk about is the absolute value. 03:25.940 --> 03:31.610 In short it's the company's intrinsic or real value you'll need to perform a stock valuation to estimate 03:31.610 --> 03:37.010 your company's intrinsic value then compare its value with the current market price. 03:37.010 --> 03:41.420 If the intrinsic value is higher than the current market price or the company stock is selling at a 03:41.420 --> 03:44.000 price which is cheaper than it's actually worth. 03:44.000 --> 03:47.120 This means it's undervalued or cheap to buy. 03:47.120 --> 03:51.850 So we'll consider buying it to make a profit when the price increases in the future. 03:52.280 --> 03:58.070 And on the other hand if the intrinsic value is lower than the current market price the stock is overvalued 03:58.190 --> 03:59.540 or expensive. 03:59.540 --> 04:06.000 We simply avoid buying this company's stock so to determine absolute value we'll use some valuation 04:06.000 --> 04:13.490 methods such as the discounted cash flow model or dividend discount model okay. 04:13.530 --> 04:19.800 The final one is the perceived value perceived value is the price that people are willing to pay for 04:19.800 --> 04:21.210 a product or service. 04:21.330 --> 04:26.250 And in the stock market game it's the price that people are willing to pay for a share of a company. 04:26.550 --> 04:30.510 The perceived value is completely unrelated to the absolute value. 04:30.510 --> 04:34.090 The best example of perceived value is this picture. 04:34.470 --> 04:38.340 It's actually worth maybe just a few hundred dollars to pay an artist to paint it. 04:38.640 --> 04:39.780 But guess what. 04:39.780 --> 04:42.140 It's worth millions of dollars. 04:42.150 --> 04:42.940 Why. 04:42.960 --> 04:47.610 Because there are people who are willing to pay that high price to own this picture. 04:47.910 --> 04:51.700 The selling price will totally depend on the perception of the buyers. 04:51.750 --> 04:53.450 And I want you to know this. 04:53.580 --> 04:59.460 The stock market also works on the perceived value in the stock price of a company reflects the perception 04:59.640 --> 05:01.420 of investors like yourself. 05:02.190 --> 05:06.990 You can easily see perceive value in growth stocks where companies are growing much faster than their 05:06.990 --> 05:09.090 competitors and the whole industry. 05:09.450 --> 05:14.610 So that's why investors are ready to take higher risks and pay a higher price for owning those stocks 05:15.420 --> 05:17.770 and to determine the perceived value of a company. 05:17.910 --> 05:20.230 You'll need to do a qualitative research. 05:20.700 --> 05:25.830 You'll need to find out what people think about that company how skillful and experienced its management 05:25.860 --> 05:30.950 is and growing their business what the values are that the company brings to the world. 05:31.200 --> 05:37.890 And the only way to know this is spending a lot of time reading news stock analyses and customer reviews 05:38.970 --> 05:43.370 in the next lecture We'll talk about another important topic of value investing. 05:43.500 --> 05:45.870 That's the margin of safety. 05:45.900 --> 05:50.870 One of the most critical factors that will determine your value investing success. 05:50.940 --> 05:52.950 OK see you in the next video.